SEC touts its crackdown on insider trading

Even as it fends off criticism in other areas, the Securities and Exchange Commission is pointing to its crackdown on insider trading as proof of its effectiveness.

Always a high priority, the agency has significantly boosted the number of cases brought against Wall Street traders and hedge-fund managers, according to data it released to Congress late last week.

That effort was punctuated by the huge insider-trading case against Raj Rajaratnam, which resulted in a $92.8-million civil penalty. That was in addition to the criminal conviction of the prominent hedge-fund manager, which was spearheaded by the Justice Department.

The SEC said it lodged 53 cases against 138 people and corporate entities in fiscal 2010, a 43% increase from the prior year. It said it filed 57 cases against 124 people and entities this year.

The agency also has developed new investigative techniques, including the creation of a market abuse unit that focuses on a variety of practices, including complex insider-trading cases, the agency enforcement chief, Robert Khuzami, told the Senate Committee on Homeland Security and Governmental Affairs last week.

“The increased number of insider trading cases has been matched by an increase in the quality and significance of our recent cases,” Khuzami said.

The SEC has come under scrutiny lately after a federal judge criticized its practice of settling cases of alleged fraud without requiring the companies and executives involved to admit guilt.

Its insider-trading credibility won't diffuse that issue, but it may give the agency some breathing room against those who say it hasn't done enough to stanch Wall Street wrongdoing.

-- Walter Hamilton

Photo: Raj Rajaratnam; Credit: Peter Foley / Bloomberg

More insider trading arrests coming, reports say

Last year at this time, news was just breaking about an expansion of the government's big Wall Street insider trading investigation.

A year later, after scads of arrests, it appears that prosecutors are still not done uncovering wrongdoing.

Authorities are preparing to arrest managers at hedge funds and mutual funds who are suspected of using inside information to make lucrative trades, according to reports out Thursday morning that cite anonymous people close to the investigation.

The new arrests are likely to come from hedge funds and mutual funds that used so-called expert network firms, which connected insiders at public companies with investors who wanted to trade stock in the companies.

Some of the expert network firms and investors at the center of the investigation have been located in California, close to the technology industry, but the funds mentioned in the new reports are based on the East Coast.

The arrests will likely come from four of the hedge funds that were raided last year, including Level Global, Loch Capital Management, Barai Capital and Diamondback Capital Management, Reuters reports. Diamondback is the only one of the four firms that has survived the turmoil.

The Wall Street Journal says that a mutual fund analyst at Neuberger Berman may also face charges.

The New York Times reports that a former Level Global analyst is cooperating with authorities.

These cases are tangentially related to the investigations that brought down Raj Rajaratnam, the hedge fund magnate who recently received the longest-ever prison sentence for insider trading, and that recently led to the arrest of former Goldman Sachs board member Rajat Gupta.

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 -- Nathaniel Popper

twitter.com/nathanielpopper

Photo: The San Francisco federal courthouse where a judge last year refused to grant bail for Winifred Jiau, arrested in relation to her work as a consultant for Primary Global Research. Credit: David Paul Morris / Bloomberg News.

The secret meeting between Henry Paulson and hedge-fund chiefs

In case there wasn't enough anger about the cozy ties between Wall Street and Washington, new revelations this morning suggest that former Treasury Secretary Henry Paulson gave hedge funds an inside scoop about the government's plans for Freddie and Fannie Mac in the heart of the financial crisis.

The revelations come from the new Bloomberg Markets magazine, which describes the exclusive meeting at the Manhattan headquarters of a hedge fund on July 21, 2008.

Around the conference room table were a dozen or so hedge-fund managers and other Wall Street executives — at least five of them alumni of Goldman Sachs Group Inc., of which Paulson was chief executive officer and chairman from 1999 to 2006.

This was after the investment bank Bear Stearns had gone under — thanks to its bets on subprime mortgages — but before Lehman Brothers declared bankruptcy, and everyone was wondering what would happen to the government-sponsored mortgage giants Fannie Mae and Freddie Mac.

That morning, before the meeting with the hedge-fund magnates, Paulson held meetings with reporters in which he said that government examinations of Fannie and Freddie were likely to prove their health.

At the hedge-fund meeting, though, Paulson sang a very different tune, according to an attendee who spoke with Bloomberg Markets reporter Richard Teitelbaum. The magazine says that Paulson told the gathered magnates that the government could, in fact seize Fannie and Freddie and wipe out their stock.

Such information would be very valuable to investors because it would allow them to sell the stock short — or bet against it. Indeed, just a few months after the meeting, the government did what Paulson had sketched out and stock in both companies lost almost all their value.

Teitelbaum writes that he did not turn up evidence that any of the meeting participants placed such a bet, but he also notes that investors do not have to provide public notice when they make short sales.

Former banker and current writer William Cohan said that such meetings between top government officials and powerful investors are actually quite commonplace. Cohan said he was particularly surprised by the inability of the meeting's participants to remember what happened or what they did with the information.

The blowback against the story has been swift. A well-read economics bloggers, Mike Shedlock, had some of the most scathing commentary:

Anyone who says they do not remember a meeting like that is a liar. Anyone who says "no comment" is indeed commenting and the possible interpretation is not pretty. So what else did Paulson say?

I would like to know who Paulson talked to outside the meeting.

Paulson did not respond to the article, other than to point the magazine to a book he wrote that makes no mention of the meeting.

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— Nathaniel Popper

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Photo: FormerTreasury Secretary Henry M. Paulson in 2008. Credit: Al Seib / Los Angeles Times

Raj Rajaratnam to pay record $93 million in insider-trading case

After receiving an 11-year prison sentence, Raj Rajaratnam is now getting the bill for his insider-trading misdeeds.

A judge today ordered the once-celebrated Wall Street financier, who was convicted in May of spearheading a massive insider-trading scheme, to pay a civil penalty of nearly $93 million. That comes on top of an earlier $10-million criminal fine and forfeiture of $53.8 million in ill-gotten gains.

Rajaratnam's total tab: $156.6 million.

Both the prison sentence and the $92,805,705 civil penalty are the largest ever in an insider-trading case.

“The penalty imposed today reflects the historic proportions of Raj Rajaratnam’s illegal conduct and its impact on the integrity of our markets,” Robert Khuzami, enforcement chief at the Securities and Exchange Commission, said in a statement.

The SEC alleged that Rajaratnam and more than two dozen others who have been caught up in a massive illicit-trading dragnet garnered illicit profits (or avoided losses) of more than $90 million through improper trading in at least 15 publicly traded companies.

The one-time hedge-fund kingpin was found guilty May 11 of 14 counts, including nine for securities fraud and five for conspiracy to commit securities fraud.

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‎

-- Walter Hamilton

Photo: Raj Rajaratnam leaving federal court after his sentencing last month. Credit: Peter Foley/Bloomberg

Indictment reveals insider-trading charges against Rajat Gupta [Updated]

Prosecutors unsealed an indictment detailing insider-trading charges against one of the kings of American finance, Rajat Gupta, who surrendered to authorities earlier Wednesday morning.

A grand jury charged Gupta, the former head of the McKinsey & Co. consulting firm, with five counts of securities fraud and one count of conspiracy to commit securities fraud for providing inside information to hedge fund magnate Raj Rajaratnam, who was recently convicted and sent to prison for 11 years for insider trading. 

The complaint, unsealed in Manhattan federal court, says that Gupta, 62, provided Rajaratnam with information he had learned as a board member of Goldman Sachs and Procter & Gamble in 2008 and 2009. In one instance, Rajaratnam placed trades based on the information within 39 seconds of learning it from Gupta, authorities said.

PHOTOS: High-profile crime: A modern history

In total, prosecutors say that Rajaratnam's Galleon Group hedge funds made profits or avoided losses of $23 million thanks to information from Gupta. They say Gupta stood to gain because of his business partnerships with Rajaratnam, including a private equity fund that they co-founded to invest in projects in Asia.

Gupta could face up to 20 years in prison for each count of securities fraud, according to prosecutors. The Securities and Exchange Commission separately filed a civil lawsuit against Gupta on Wednesday morning.

In a statement, the Manhattan U.S. attorney, Preet Bharara, said: "Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders. As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr. Gupta's breach of duty."

The case is the latest insider-trading case brought by the U.S. attorney, who has said recently that the practice is "rampant" on Wall Street. The charges against Gupta, though, represent the highest profile figure ensnared in the wide-ranging investigation.

Gupta was first fingered in the probe earlier this year when the SEC accused him in regulatory proceedings of improperly sharing information he learned as a member of Goldman's board of directors.

Gupta was accused at the time of passing information to Rajaratnam about Warren Buffett's $5-billion investment in Goldman at the height of the financial crisis. The revelations came just days before Rajaratnam's trial on insider-trading charges began.

Since Gupta was accused, though, his case had mostly gone quiet, and there was some speculation that it was being dropped. Gupta sued the SEC this summer, accusing the agency of treating him unfairly by pursuing him through administrative proceedings rather than the more typical lawsuit or criminal charges.

In a dramatic turn in the case, Gupta surrendered to the FBI to face criminal charges at 5:15 a.m. Wednesday morning at the agency's Manhattan headquarters. An FBI spokesman said Gupta has been processed and would be formally arraigned in front of a judge later in the day.

[Updated at 9:55 a.m.: Gupta's lawyer, Gary Naftalis, said that the charges are "totally baseless" and that Gupta lost the investment he made with Rajaratnam.

"The facts in this case demonstrate that Mr. Gupta is innocent of any of these charges and that he has always acted with honesty and integrity.  He did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo," Naftalis said in a statement. "We are confident that these accusations – which are based entirely on circumstantial evidence – cannot withstand scrutiny and that Mr. Gupta will be completely exonerated of any wrongdoing."]

Gupta's arrest marks a low point in the downward arc of a man who once was one of the most trusted figures in the corporate world, conferring with the most important figures of American finance. Within days of the civil case being made public in March, Gupta resigned from his positions on several corporate boards, including Procter & Gamble and American Airlines parent AMR Corp.

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-- Nathaniel Popper

Photo: Rajat Gupta, shown in 2008, has surrendered to the FBI. Credit: Mackson Wasamunu / Reuters

Rajat Gupta in custody as insider-trading case takes dramatic turn

One of the most revered figures in U.S. finance, Rajat Gupta, surrendered to the FBI on Wednesday morning to face charges in a wide-ranging government investigation of insider trading on Wall Street.

Gupta, the former head of the consulting firm McKinsey & Co., was first fingered in the probe earlier this year when the Securities and Exchange Commission accused him in regulatory proceedings of improperly sharing information he learned as a member of Goldman Sachs' board of directors.

Gupta was accused at the time of sharing information with hedge fund magnate Raj Rajaratnam about Warren Buffett's $5-billion investment in Goldman at the height of the financial crisis. The revelations came just days before Rajaratnam's trial on insider-trading charges began. Rajaratnam was convicted, partially based on his interactions with Gupta, and recently received the longest sentence ever for insider trading violations.

Since Gupta was accused, though, his case had mostly gone quiet, and there was some speculation that it was being dropped. Gupta sued the SEC this summer, accusing the agency of treating him unfairly by pursuing him through administrative proceedings rather than the more typical lawsuit or criminal charges.

In a dramatic turn in the case, Gupta surrendered to the FBI to face criminal charges at 5:15 a.m. Wednesday morning at the agency's Manhattan headquarters. An FBI spokesman said Gupta has been processed and will be formally charged later today by the U.S. attorney's office. The criminal indictment charging him is still under seal.

Gupta's lawyer, Gary Naftalis, could not immediately be reached for comment. When the SEC initially accused Gupta, Naftalis said  "Mr. Gupta has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact-finder."

Gupta's arrest marks a low point in the downward arc of a man who was once one of the most trusted figures in the corporate world, conferring with the kings of American finance. Within days of the civil case being made public in March, Gupta resigned from his positions on several corporate boards, including those of Procter & Gamble and American Airlines' parent company.

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Photo: Rajat Gupta, shown in 2010, is accused of insider trading. Credit: Eric Piermont / AFP/Getty Images

Wall Street: Stocks down, gold up

Gold: Trading now at $1,656 an ounce, up 0.2% from Monday. Dow Jones industrial average: Trading now at 11,791.24, down 1.0% from Monday.

Home prices, stocks falling. Stocks fell this morning after it was announced that U.S. home prices dropped again, and as investors await the results of the European financial summit.

Wall Street moves West. As Wall Street lays off employees, some regional banks further west are building up their investment banking operations.

Suspicious of Stevie. Regulators have been flagging suspicious activity at Steven Cohen's hedge funds for years, the Wall Street Journal found.

Divided twins. The Daily gets the story of a set of twins split by the barricades in lower Manhattan, one in the 1%, the other in the 99%.

Raj speaks. After Raj Rajaratnam spoke publicly for the first time since being arrested on insider trading charges, the U.S. attorney's office said he was lying.

-- Nathaniel Popper in New York
Twitter.com/nathanielpopper

Photo credit: Stan Honda / Getty Images

Raj Rajaratnam gets 11 years, not 24; illness revealed in court

Raj Rajaratnam is "the modern face of illegal insider trading," said Assistant U.S. Atty. Reed Brodsky. The declaration was made in court Thursday at the historic sentencing of the hedge fund magnate, who was convicted in May on 14 counts of conspiracy and securities fraud.

The 11-year term was the longest sentence ever in an insider-trading case, according to prosecutors, who had sought 19 to 24 years.

But U.S. District Judge Richard J. Holwell explained the lesser sentence, revealing for the first time that Rajaratnam suffered from advanced diabetes and may need a kidney transplant. Holwell also cited Rajaratnam's charitable works.

The sentence, with two years of supervised release, is still part of a recent trend toward longer sentences for insider-trading offenses.

The decision in the case had been closely watched. The founder of the Galleon Group hedge funds was at the center of the recent crackdown on insider trading, the most intensive since the 1980s and the successful prosecutions of Ivan Boesky and Michael Milken.

Rajaratnam sat next to his lawyer during the proceedings and quietly said, "No, thank you," when asked by the judge if he wanted to speak.

Holwell rejected Rajaratnam's request to be released on bail, pending appeal, and ordered Rajaratnam to report to authorities within 45 days. He also ordered Rajaratnam to pay a $10-million fine.

The judge agreed to recommend that Rajaratnam be put in the medical facilities at Butner Federal Correction Complex in North Carolina, the same prison that houses Bernard Madoff and the former top executives at Adelphia Communications.

Several of Rajaratnam's former employees and colleagues already have been sent to prison in related cases.

The extensive insider-trading probe has charged 49 people since 2009. Among them, Danielle Chiesi, a former beauty queen who received a 30-month prison sentence in July for funneling insider tips to Rajaratnam.

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Photo: Raj Rajaratnam, co-founder of Galleon Group LLC, enters federal court in New York on Thursday. Credit: Peter Foley / Bloomberg

Raj Rajaratnam gets 11-year term in Galleon insider trading case

Hedge fund magnate Raj Rajaratnam was sentenced to 11 years in prison -- the longest sentence ever for an insider-trading case, prosecutors said.

The Galleon Group founder was convicted in May on 14 counts of conspiracy and securities fraud following a two-month trial. Many considered the conviction to be the heaviest clampdown on Wall Street bad behavior since Ivan Boesky went to prison for two years in the 1980s.

Rajaratnam’s conduct “reflects a virus in our business culture that needs to be eradicated,” said U.S. District Judge Richard J. Holwell while handing down the sentence.

When asked by Holwell if he wanted to speak, Rajaratnam tersely refrained.

Prosecutors relied on extensive electronic wiretaps to nab Rajaratnam, who was found guilty of making more than $50 million in illicit profits by acting on secrets from contacts at upper-echelon firms such as Goldman Sachs Group Inc., McKinsey & Co. and Google Inc.

Prosecutors had sought a sentence of 15 to 20 years. In handing down a more lenient sentence, Holwell cited Rajaratnam’s advanced diabetes and other factors.

Silence hung over the courtroom as the sentence was read, Rajaratnam sitting motionless. After court adjourned, he turned to face the room with an elusive grin that betrayed no emotion.

Since his arrest in October 2009, more than 20 others involved in the case have cut deals with prosecutors. Rajaratnam must report to prison within 45 days.

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Photo: Raj Rajaratnam, co-founder of Galleon Group LLC, enters federal court in New York on Thursday. Credit: Peter Foley / Bloomberg

Former Angels baseball player Doug DeCinces accused of insider trading, pays $2.5-million fine

Former Angels baseball player Doug DeCinces has agreed to pay $2.5 million in penalties and interest to settle allegations that he used inside information to make more than $1.2 million in profits trading the stock of Santa Ana-based Advanced Medical Optics Inc. in 2009.

The Securities and Exchange Commission announced the settlement the same day that it filed a civil lawsuit detailing allegations that DeCinces, acting on an inside tip, bought more than 83,000 shares of Advanced Medical Optics in the weeks leading to its 2009 acquisition by Abbott Laboratories Inc.

Shares of the Santa Ana company increased 143% after a public announcement in January 2009 that it would be acquired by Illinois-based Abbott.

According to the SEC lawsuit, DeCinces received word of the pending acquisition from an employee of Advanced Medical Optics.

The SEC said DeCinces also illegally tipped off three associates who traded on the confidential information: physical therapist Joseph J. Donohue, real estate lawyer Fred Scott Jackson, and businessman Roger A. Wittenbach.

DeCinces, 60, of Laguna Beach, played major league baseball from 1973 to 1987. He now works as president and chief executive officer of a real estate development firm in Irvine.

DeCinces hit 237 home runs during his career in the major leagues. He played with the then-California Angels from 1982 to 1986.

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-- Stuart Pfeifer

Photo: Doug DeCinces, left, congratulates pitcher Tommy John after the California Angels defeated the Milwaukee Brewers in Game 1 of the 1982 American League Championship Series. Credit: Associated Press  

Hugh Hefner's son-in-law accused of insider trading [Updated]

Playboy founder Hugh Hefner's son-in-law has been accused by the Securities and Exchange Commission of using inside information to gain profits and avoid losses totaling more than $100,000 in trades of Playboy stock.

In a lawsuit filed Wednesday in federal court in Illinois, the SEC said that William Marovitz sold shares of Playboy between 2004 and 2009 ahead of public announcements related to Iconix’s potential acquisition of Playboy and Playboy negative earnings announcements.

Marovitz, 66, of Chicago has been married to former Playboy Enterprises Inc. chief Christie Hefner since 1995. Christie Hefner, 58, was chief executive of Playboy from 1988 to 2009.

In one trade highlighted in the lawsuit, Marovitz purchased shares of Playboy on Nov. 10, 2009, using inside information obtained from his wife, two days before a public announcement that Playboy was in talks to be acquired by Iconix. Playboy stock increased by 42% that day.

Playboy and Marovitz were not immediately available for a comment.

The lawsuit seeks the return of Marovitz’s "ill-gotten gains," plus civil penalties.

[Updated, 12:55 p.m., Aug. 3: The SEC said in news release that Marovitz, without admitting or denying guilt, has agreed to pay $168,352 in restitution, interest and penalties in a settlement with the SEC. The settlement is subject to approval by the court.]

From the lawsuit:

Marovitz bought and sold shares of Playboy in his own brokerage accounts between 2004 and 2009 ahead of public news announcements related to Iconix’s potential acquisition of Playboy, Playboy’s negative earnings announcements and Playboy’s offering of stock. As a result of his misuse of confidential information about Playboy, Marovitz gained profits and avoided losses totaling $100,952.40.

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-- Stuart Pfeifer 

Photo: Hugh Hefner. Credit: Kirk McKoy / Los Angeles Times